Why Is The Government In The Flood Insurance Business?

There's a quick, one-word explanation for why the federal government started selling flood insurance: Betsy.

Hurricane Betsy, which struck the Gulf Coast in 1965, became known as billion-dollar Betsy. Homes were ruined. Water up to the roofs. People paddling around streets in boats. Massive damage.

This would be the time when you'd expect people to be pulling out their flood insurance policies. But flood insurance was hard to come by. You could get fire insurance, theft insurance, car insurance, life insurance. Not flood.

"There was a lack of data," says Eric Smith, president and CEO of Swiss Re in the Americas. "One of the bedrock principles of insurance is it has to be something that's somewhat measurable. You have be able to calculate its frequency, its severity. How often this going to occur and how much damage is it going to do?"

A few years after Betsy, in 1968, the government decided it would take on the job of selling flood insurance. Some people hated this idea. If private insurance companies wouldn't sell policies to people who wanted to live in flood zones, they argued, why should the government?

This argument did not win the day. The government created flood maps, gathered data, and set up the National Flood Insurance Program.

"I think it generally worked out OK overall, until Katrina," says Mark Browne, a professor of risk management and insurance at the University of Wisconsin, Madison. "Katrina was a major loss for the National Flood Insurance Program. It blew through its money and went into deficit.

"This is why flood insurance is a tricky business. You can have a quiet three decades, then a huge hurricane plows into a major city. Suddenly you're back in the red."

Over the past few years, the National Flood Insurance Program has had to borrow $17 billion from the government.

So were the critics right? Is the government running a bad business? Maybe not. After a big national disaster, Browne argues, the government is on the hook anyway. It might as well collect some money by selling insurance.

The head of the National Flood Insurance Program says the program plans to repay the money it borrowed from the government — but it may take 20 or 30 years to do so.

Transcript

STEVE INSKEEP, HOST:

Millions of Americans who live close to water have occasion to think about flood insurance. In the United States, if you want to buy flood insurance, the odds are you're going to be buying it from the United States government. The National Flood Insurance Program was intended to pay for itself, set the premiums at a rate that they finance the payments.

But the program is currently a money loser, which only got worse after Hurricane Sandy. David Kestenbaum of NPR's Planet Money team has this story about how the government got into the flood insurance business.

DAVID KESTENBAUM, BYLINE: There's a quick, one-word explanation for why the government started selling flood insurance. That word: Betsy.

WINDELL CURALL: Hurricane Betsy hit in 1965, September 9th.

KESTENBAUM: Windell Curall runs a local levee district in Louisiana but he remembers that exact date for a different reason.

CURALL: It hit on my 14th birthday.

KESTENBAUM: Wow.

CURALL: The uninvited guest.

KESTENBAUM: Windell's family lived south of New Orleans, a place he describes as half land, half water. His family had lived there for generations. And on that day, in 1965, something like 30 relatives came over to take refuge.

CURALL: Uncles, aunts and first cousins. And they came up to, I say, the high country. They left land that was about three feet above sea level to come to our house, which about five feet about sea level.

KESTENBAUM: He remembers the storm hitting with terrifying winds. Then the eye of the storm. Then the winds, from the opposite direction.

CURALL: I remember attic door getting blown off from the wind pressure, and they actually out and nailed it shut.

KESTENBAUM: The storm became known as Billion Dollar Betsy. Homes were ruined. Water up to the roofs. People paddling around streets in boats. All that stuff. Massive damage.

And this would be the time when you'd expect people to be pulling out their flood insurance policies. But - they couldn't. Flood insurance was really hard to come by. You could get fire insurance, theft insurance, health insurance, car insurance, life insurance. But not flood insurance.

Eric Smith works in the insurance industry. He is president and CEO of Swiss Re in the Americas.

ERIC SMITH: There was a lack of data. One of the principles, the bedrock principles of insurance is its got to be something that's somewhat measurable. You have to be able to calculate its frequency and its severity and, you know, how often is this going to occur and how much damage will it do

KESTENBAUM: A few years after hurricane Betsy, in 1968, the government decided it would take it on the job of selling flood insurance. Some people hated this idea. If private insurance companies wouldn't sell policies to people who wanted to live in flood zones, why should the government.

That argument did not win the day. The government created flood maps, gathered data, and set up the National Flood Insurance Program.

MARK BROWNE: I think it generally worked out OK, overall, until Katrina.

KESTENBAUM: Mark Browne is a professor of Risk Management and Insurance at University of Wisconsin Madison.

BROWNE: Katrina came. And Katrina was a major loss for the National Flood Insurance Program. Now, blew through its money and went into deficit.

KESTENBAUM: This, frankly, is the other reason why flood insurance is a tricky business. You could have a quiet three decades - 30 years - and then, bam, a huge hurricane plows into a major city. Suddenly you got to pay out all this money.

And on the heels of Katrina there was - you may remember - Rita and Wilma. The National Flood Insurance Program had to borrow money from the government. A lot of money, $17 billion dollars.

BROWNE: That's a lot of money to borrow.

(LAUGHTER)

BROWNE: That's exactly right.

KESTENBAUM: The debt got worse after Sandy. So were the critics right? Is the government running a bad business. Mark Browne says maybe that's the wrong way to look at it. After a big national disaster, the government is on the hook anyway. It might as well collect some money by selling insurance.

And all that money the program had to borrow, David Miller, who oversees the National Flood Insurance Program, says the plan is to pay it back.

DAVID MILLER: If I look at the rates now, and where I am and what's expected and when I can project. We can repay the debt. It would be over a long time.

KESTENBAUM: He says it could take 20 or 30 years.

David Kestenbaum NPR News

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